Electric cars currently make up around 5% of total car sales in North America, and Tesla (NASDAQ: TSLA) sales make up around 75% of that 5%. Tesla not only enjoys a dominant position in the US, but it also enjoys a dominant position globally. But 2022 could be a watershed year, as new EV models are introduced onto a market that is far more end-user friendly, thereby starting a new trend with Tesla losing its pole position in the market.
The first two best-sellers are both Tesla models followed by the Ford Mustang and the Hyundai Ioniq, which was recently released and is expected to be the fourth most prominent in terms of sales. Furthermore, many brands such as Rivian, Polestar, Kia, Volkswagen, Ford, GM, and BMW are all expected to release EV models this year. Alongside European and Japanese automakers, Chinese companies are also releasing highly competitive models, with the likes of BYD and Li Auto making strong gains in the Chinese market (a key market for Tesla), which will undoubtedly put a lot of pressure on Tesla, which has until now not faced much competition globally.
Tesla’s falling R&D should concern investors
Tesla claims itself to be a technology company. Despite this claim, the fact that it is continually reducing R&D is a point of concern. Therefore, it is likely that Tesla doesn’t have as big competitive advantage over its competitors as the market believes. What’s interesting to note is that Tesla’s R&D as a percentage of sales is also not very high, and is now on par with the likes of GM, down significantly from years in the past when it was spending 9-10% on R&D, it is now down to 4-5%. So not only is the intensity of R&D falling, but it's facing an increasingly competitive environment. The reality is Tesla's competitors will catch up with it when it comes to driving range and charging infrastructure. Tesla is likely to require higher R&D spend in order to remain competitive, but if it were to increase R&D to historical levels, it may slip back into low profitability, or outright losses, which would negatively affect the stock at least in the short term.
Tesla's price keeps dropping, and it’s losing its market share
Tesla is projected by analysts to lose its market share from the current levels of around 70-75% to 20-25% in a couple of years. By 2025 some projections expect that market share could fall as far as 10% or below. This could affect margins and will slow the growth of the company. The second-largest EV seller is Nissan, but as previously mentioned other brands are bringing their own models onto the market.
And while Tesla's price and market share continue to fall, competitors such as BYD are quickly gaining market share in their domestic markets. Additionally, it’s a well-known fact that Tesla is having a hard time competing in places like China, which it expects to be the biggest source of revenue in the future. This seems unlikely at the moment, with competition becoming increasingly fierce and Tesla unlikely to achieve the targets it has set for the market.
To compete better, Tesla cut its Model 3 sedan price by $1000 and model Y by $2000 in 2020, they haven't been able to maintain this cut and had to increase prices recently as a result of inflation, which continues to weigh on input costs. Model 3 now starts at $46,000, and although the company did cut the price for the Model-S by $3000 this year, the overall effect of the price changes is likely to weigh negatively on Tesla. Tesla’s sales could slow down and in turn, this could exacerbate the loss of market share, especially in key markets such as Europe and China, where competitors offer alternatives that may be better value for money. Due to the increase in prices estimates show that the average price of a Tesla is probably around $53,000. BMW on the other hand averages around $55,000 per car, and Mercedes averages around $53,000, both of whom arguably offer a better product than Tesla.
Tesla is losing market share not only in China but in the U.S. and Europe as well. This was to be expected as newer models and competitors came on the market, and the likes of Volkswagen launched its ID.3 model. Furthermore, as more and more EV alternatives come on the market, Tesla may have to reverse course cutting prices again for its main models, which would put pressure on profitability and in-turn the stock.
Overall, Tesla faces a range of issues as it tries to remain competitive. Historically, car companies have had low margins and a competitive environment. Tesla has managed to avoid many of the pitfalls by achieving higher margins and maintaining a high market share. All of this could change as soon as the outlook changes this year.